Summary
ABSTRACT
Ride long-term opportunities with eye on green transition
The global economy should rebound strongly this year from its worst economic slump since the 1930s. However, the growth pattern is expected to be uneven across advanced and emerging economies, hinging critically on the virus cycle and the success of vaccine campaigns. Implementation of vaccine programmes is proving quick and effective across advanced economies. Emerging countries are facing structural bottlenecks though. On financial markets, the massive US fiscal stimulus has pushed up inflation expectations amid higher growth projections, steepening the yield curve and strengthening the dollar. More generally, advanced economies have been leading on the fiscal front and divergent DM vs EM paths will remain in place, narrowing the EM-DM growth gap. All in all, emerging economies will face some key challenges this year, though their fundamentals are better positioned than in 2013:
- They are currently less dependent on easy dollar funding, thanks to improved current account positioning;
- Portfolio flows have proved resilient; and
- The search-for-yield drive among investors has extended the global demand for emerging assets.
Among emerging economies, China stands out for its ability to contain the virus effectively and recover quickly, leading the emerging rebound. As such, Asia – particularly China – looks set to become a core component of global portfolios. In order to ride any opportunity arising from such a scenario, investors will need to stay active and flexible, embracing a long-term perspective to take advantage of new opportunities. In this regard, China’s sovereign local debt offers good value in terms of yield and diversification while opportunities could arise in segments such as green bonds, where issuance has been rising strongly across emerging economies. The broad emerging equity outlook remains constructive and frontier markets offer a long-term growth story.
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